Residual Value

“It’s probably the question we get most: ‘What will the aircraft be worth in five years?’” said jet broker Bryan Comstock. “The honest answer is, ‘I don’t know.’”

Friday, June 28, 2013 - 9:15am

If you’re shopping for an aircraft, paying attention to residual-value projections could save you a small fortune.

Say you’re choosing between two new long-range models—Jet A for $44.4 million and Jet B for $45.7 million. Ten years later, Jet A might fetch $25.5 million while Jet B might bring $32 million. Given those prices, depreciation would cost you $18.9 million for Jet A and $13.7 million for Jet B. Jet B would cost more to begin with but—all other factors being equal—roughly $5 million less in the end.

“Residual value has to be a key consideration for both buyers and their financiers,” said Mike Kahmann, managing director and group head at CIT Business Aircraft Finance in Plantation, Florida. “That’s because planes that retain more of their value reduce the cost of ownership and can offer a solid basis for more appealing financing terms.”

Residual value can be tough to predict, though. For example, Hawker Beechcraft’s bankruptcy dramatically impacted prices of used Hawker 4000s, something that would have been difficult to forecast. “I sold a Challenger for $10 million a few years ago,” said Jay Mesinger, CEO and president of J. Mesinger Corporate Jet Sales in Boulder, Colorado. “It’s worth $7 million today. I couldn’t have predicted that. Now there are 70 on the market. Three years ago there were 10.”

Aircraft broker and BJT columnist Bryan Comstock commented similarly. “It’s probably the question we get most: ‘What will the aircraft be worth in five years?’” said Comstock, managing partner at Long Beach, California-based Jet­Effect. “The honest answer–and I tell them this–is, ‘I don’t know.’”

Still, enough data exists to allow some institutions and individuals to make credible projections. CIT Business Aircraft Finance, for example, predicts residual values based on an aircraft’s age, condition and maintenance, according to Kahmann. The forecasts also take into account competing aircraft and product introductions that may impact residuals. Buyers need financing “that is tailored to the future value profile of the subject aircraft,” Kahmann noted. “And buyers need to consider that profile as a key driver of ownership cost.”

W. Barry Smith also believes that residual value should be a key factor in the purchase decision. Smith, an aerospace engineer and longtime aviation marketer who now owns a business jet consultancy called WBS Jets, has analyzed pricing data for more than 50 aircraft models going back as far as 20 years. The data show how prices of competing jets compare over time, so it’s easy to see which ones would have felt the least impact from depreciation.

“On the sales side, it’s helpful in convincing sellers of the real value of their airplanes,” he said.